This Costco competitor looks cheap. How to bet on it using options

The PEG Ratio is a valuation metric that helps investors assess the fairness of a stock’s price relative to its growth potential. It builds on the P/E ratio (price-earnings ratio) by incorporating the expected long term earnings growth rate, providing a more dynamic perspective. The ratio is calculated by taking its P/E ratio and dividing that by its anticipated annualized percentage growth in earnings, often expressed as a whole number (e.g., 15% growth is used as “15” in the calculation). Consider BJ’s Wholesale Club Holdings (ticker BJ) , which reports earnings on Thursday. Marlborough, Massachusetts-based BJ’s operates membership warehouse clubs. Like its competitors, most revenues come from groceries (70%). With projected revenues of about $20.6 billion for fiscal 2025 (ending January 31st, 2026), BJ’s is a smaller version of Costco ($265 billion in projected revenues over the same period) and Walmart-owned Sam’s Clubs ($90 billion projected). Using a two-axis growth of a similar relative scale, we can normalize and compare BJ’s revenue growth to Costco’s. Costco’s growth rate is better than that of its smaller competitors, but is the stock itself a better value? Over the past five years, Costco has experienced a growth rate of 11%, and BJ’s is a more modest but still respectable 7%. COST BJ 5Y mountain Costco vs. BJ’s, 5 years A prudent investor would prefer Costco to BJ’s if they could buy the companies for the same earnings multiple. Of course, the companies trade at significantly different multiples. BJ’s trades at 21 times forward earnings, a meaningful discount to the S & P 500, which trades at about 25 times forward profits, and Costco trades at an eye-watering 50 times forward earnings. This is where the PEG ratio comes in handy. BJ’s PEG ratio is 21/7 = 3. Costco’s PEG ratio is 50/11 = 4.5. All else equal, a lower PEG ratio is better, so by this metric, at least BJ’s appears to be the more attractive investment. Most investment metrics make some simplifying assumptions, not least of which is that we can reasonably estimate a company’s growth rate through time; in this case, I took past growth rates and extrapolated, which is probably okay for the near future but isn’t reasonable over the long-term. One would have reached some flawed conclusions if one extrapolated the growth rate of the railroads in the late 19th century or photographic film and typewriter companies in the mid-20th century. Other considerations: We’re comparing BJ’s relative value to similar (albeit larger) businesses. While the business model is identical, Costco does have the advantage of serving a more affluent clientele. Additionally, smaller BJs is regional, serving the East Coast, Midwest, and the South. The brutal truth for investors right now is that equity valuations are generally lofty from a historical perspective. While investors appear optimistic about Trump’s victory, the economic reality of some of the proposals that have been floated, such as massive government spending cuts and tariffs on imported goods, is hard to estimate if they’re even feasible. Buying companies at lower valuations provides a better margin of safety if investors become more skeptical. The trade Currently, the options market implies an 8.5% earnings-related implied move for BJ’s, which is larger than the average over the past eight quarters. One way to capitalize on this is with a “strangle swap,” selling a nearer-dated strangle and using the proceeds to help finance the purchase of a longer-dated one, in this case , the December/February 80/95, where I’ve selected strikes $7.50 from Friday’s closing price, which is consistent with the anticipated magnitude of the earnings move that typically follows. Sell BJ Dec. 20 $80 put Buy BJ Feb 21 $80 put Sell BJ Dec. 20 $95 call Buy BJ Jan. 17 $95 call DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.